Becoming Poorer

Federal Reserve Monster

For many years I have believed the US as a people are getting poorer. Two-income families did not arise as a result of the women’s liberation movement. They arose out of necessity. The primary bread-winner’s real earnings were not enough to support the family.

Inflation has masked the effects of what has been happening to the average citizen.  I am not a big believer in the BLS-published CPI data, or for that matter in many government-issued statistics. For reasons why, see John Williams’ work. Yet, even using the government’s numbers, real weekly wages today are lower than where they were in 1964! Using the same figures, the government has destroyed over 80% of the purchasing power of the dollar since 1971.

In an honest economy (by that I mean one where money holds its purchasing power and provides realistic price signals to the economic actors), goods get cheaper every year because of productivity increases. In such an economy, even without wage increases or promotions, peoples’ standards of living improve as a result of price decreases.

Stable to declining prices were normal during the 19^th Century. The standard of living increased rapidly during that era.

Since the inception of the Federal Reserve, the dollar has lost about 96% of its purchasing power. Recently, the decrease in purchasing power has accelerated, amounting to over 80% since 1971. Price and interest rate distortions have created malinvestments and too much consumption.

Since the late 1970s, our economy has been growing more slowly, producing fewer jobs.  Incomes have not kept pace with inflation. The following anecdotal evidence provides an idea of what has happened:

• In the early 1960s, one could pay for a year of college with a summer job.  Today, students are forced to borrow even if they work during the summers and during the school year. Many come out of college with staggering debts.
• In 1967, the average US automobile sold at a retail price equivalent to $1.00 per pound. That same automobile today costs around $8.00 per pound.
• Families in the 1960s could afford to buy homes and put 20% down. Home prices are so far out of line with incomes in most parts of this country that that is no longer possible for most families.
• In the 1960s health insurance was a relatively rare benefit. Doctors made house calls. Fees were about $10 for a visit. People paid out of pocket, including for major medical expenses.
• Coke and Pepsi cost about a dime in the early 1960s. A six-pack of beer was a $1.00. Now we pay $1.25 for a bottle of water.
• The real weekly wage is below where it was in 1964 and has been since 1977.

Most of these items increased faster than the so-called cost of living as measured by the government. All increased faster than wages. Despite increasing nominal incomes, most Americans are getting poorer.

From a slightly different perspective, assume a person earned $15,000 as an accountant in 1971. Using the government’s inflation numbers, he would have to be earning $75,000 today to just stay even. (Of course, because of taxes, even that would not be enough). Some of you might be saying, that’s about right because that was what I was earning back then, and I make about $75K now. Kudos to you. But there is at least one flaw in your thinking.

Presumably you have taken on additional responsibilities over the period. Probably you have had a few promotions and title changes. Under these circumstances, you have lost ground to inflation because you are doing a different, more demanding job. Only if you are doing the exact same job, would you have kept pace with inflation. Even in that situation, presumably you have become more skilled at that job over time, yet that is not reflected in your pay.

Another factor is the manner in which the government calculates its inflation statistics. As mentioned above, John Williams has tracked this for years and argues that, due to changes in methodology, the government is understating real inflation. Using his rather than the government’s numbers would make things appear much worse.

The motivation for this post came from “It’s Impossible to “Get By” In the US” by Graham Summers who dissects how the median income in the US is no longer enough to live on. He concludes:

In plain terms, even if you are extremely frugal and careful with your money, it is virtually impossible to “get by” in the US without using credit cards, home equity lines of credit or burning through savings. The cost of living is simply TOO high relative to incomes.

Summers ignores purchasing power as a determinant in his explanation although does allude to it in his conclusion as to why we cannot have a sustainable economic recovery:

This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).

Summers’ article is worth reading to appreciate what has happened to the average consumer in this country. Many will be amazed to see how the trickle of inflation coupled with a slow or no-growth in incomes has made us all poorer.

Tags: Cpi Data, Economic Actors, getting poorer, Power Of The Dollar, Price Signals, Productivity Increases, Womens Liberation Movement